Frito-Lay, Plus Developing And Emerging Markets Drive Growth For PepsiCo In Q1

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Continued weakness in the North American Beverage (NAB) segment did not hamper PepsiCo‘s (NYSE:PEP) results as much in the first quarter, as its other segments were able to deliver strong growth to offset the weakness. The food and beverage company reported earnings of 96 cents per share on revenues of $12.56 billion, with both metrics exceeding consensus estimates. PepsiCo has in the past stated its intentions to increase the marketing spend behind its core beverage portfolio, to halt the decline, and this sentiment was again echoed in the first quarter earnings conference call. Moreover, beyond trademark Pepsi, NAB is performing reasonably well, in the face of a highly competitive environment. A decline in EPS had been expected, when compared to the corresponding quarter of last year, as a result of the weakness in NAB which would have pressured the margins. However, the decline in operating margins was more than offset by positive foreign currency translations and a reduced tax rate, resulting in the company reporting an EPS growth.

We have a $125 price estimate for PepsiCo, which is higher than the current market price. The charts have been made using our new, interactive platform. You can modify the different driver assumptions by clicking here for our interactive dashboard, to gauge their impact on the earnings and price per share metrics.

Factors That May Impact The Performance In The Future

1. Increased Marketing Spend For Core Beverages: While PepsiCo has moderately increased media spend over the past three years, its biggest competitor – Coca-Cola – has done so by a substantial margin. While this has benefited the latter, PepsiCo has struggled as a result. In response to this, the company has allocated increased media to trademark Pepsi. It has also launched a new “Pepsi Generations” campaign, with PepsiCo expecting improving sales and market share as an outcome. On the other hand, this step could also pressure the operating margins of the company, offsetting any benefit received from the productivity initiatives implemented by the company to induce cost savings.

2. Growth Of Healthier Beverages: PepsiCo’s tea portfolio, with brands including Lipton and Pure Leaf, has grown retail sales in the range of mid-single digits to as high as 21% over the past 17 quarters. In enhanced water, both LIFWTR and newly launched Bubly have grown nicely. KeVita, PepsiCo’s line of premium organic live probiotic beverages, grew retail sales 50% in Q1, following 66% growth for the full year 2017. The growth of these brands is highly important for the company, as significant growth here may help to offset some of the weakness in the core portfolio.

3. Importance Of Frito-Lay: Frito-Lay North America (FLNA) grew revenues by 3% in the quarter, driven by 2 percentage point growth of price, and one of volume. While Frito-Lay North America (FLNA) contributes to roughly a quarter of the company’s revenues, its share of the total operating profit is about 42%. We expect the strong growth rates of FLNA to continue in the future, boosted by the segment’s foray into new products and healthy snacks. For example, due to the success of Lay’s Poppables, launched in 2017, FLNA extended the Poppables product line-up with the introduction of new Lay’s Poppables Honey Barbecue and a 12-count multipack of Poppables Sea Salt. The company has also extended the Simply sub-line (which offers natural and organic versions of popular snack brands) by introducing new package varieties with the Simply variety pack and a three-flavor lineup of single-serve packages for Simply Lay’s, Cheetos, and Doritos offerings.

4. Possibility of Refranchising Bottling Operations: CEO Indra Nooyi mentioned the company is evaluating the bottling operations, and whether it would make more sense for it to be part of PepsiCo, a stand-alone entity, or for it to be refranchised. PepsiCo’s biggest competitor, Coca-Cola, is in the midst of a multiple-year process of refranchising its bottling operations, which has plagued its top-line, but has had a positive impact on its bottom-line.

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